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Notice

Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing and Order Granting Accelerated Approval of a Proposed Rule Change Relating to Adjustment Increments and Decimalization

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Start Preamble September 11, 2000.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] notice is hereby given that on August 9, 2000, The Options Clearing Corporation (“OCC”) filed with the Securities Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which items have been prepared primarily by OCC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested parties.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The proposed rule change clarifies OCC's existing policies on minimum adjustment increments and rounding and proposes new minimum adjustment increments and rounding provisions with respect to decimal strike prices. The proposed rule change also states OCC's intention to restate existing strike prices in decimals when decimal strike prices are introduced for new series in the same class of options.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, OCC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. OCC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements.[2]

(A) Self-Regulatory Organization's Statements of the Purpose of, and Statutory Basis for, the Proposed Rule Change

The purpose of the proposed amendments to Article I, Section 1 and Article VI, Section 11 of OCC's By-Laws is to clarify OCC's existing policies regarding minimum adjustment increments and rounding and to state the minimum adjustment increments and rounding provisions that will apply during and after the transition to decimal strike prices. The proposed amendments also announce OCC's intention to restate existing strike prices in decimals when decimal strike prices are introduced for new series in the same class of options so long as that can be done without changing the absolute value of the existing strike prices.

Article VI, Section 11 of OCC's By-Laws currently states that, “as a general rule,” OCC will adjust to the “nearest trading increment,” which is defined in Article I of the By-Laws as the minimum trading increment specified by the primary exchange for the underlying security. OCC's practice, as disclosed in the options disclosure document, is to round to the nearest eighth when making adjustments. OCC follows this practice even where the trading increment for the underlying security may be one-sixteenth rather than one-eight. With decimalization, the potential exists for even smaller minimum trading units. OCC intends to continue its disclosed policy of rounding to the nearest eighth in the case of fractional prices and to round to the nearest cent in the case of decimal prices. Thus, adjustments will be made to the nearest eighth or cent even if the trading increment is more or less than an eighth or a cent. Accordingly, OCC is proposing to define a new term “adjustment increment” and to change the reference in Article VI, Section 11 to refer to “adjustment increment” rather than “trading increment.”

OCC rounds up when an adjusted exercise price is equidistant between two adjustment increments. OCC proposes to amend Article VI, Section 11 accordingly.

The existing text of Interpretation and Policy .09 is being replaced by a Start Printed Page 56015provision allowing OCC to make a smoother transition from fractional to decimal strike prices, during which some strikes are expressed in fractions and others in decimals. Because the minimum decimal strike price increment will be one cent, there will be some fractional strike prices (e.g., eighths) that cannot be converted into decimals without a loss of value. However, there will be others (e.g., quarters) that convert evenly into decimals. OCC wants to avoid simultaneously expressing identical amounts in fractions and decimals. Accordingly, OCC proposes to restate the exercise prices of existing series of options decimals when the first decimal series is introduced with the same underlying interest. OCC will restate exercise prices in decimals only for series having fractional strike prices that convert evenly into dollars and cents. Thus, a strike price of 253/4 would be expressed as 25.75. Where a fractional strike does not convert evenly into decimals, it will continue to be expressed as a fraction until the series expired. Thus, for example, a strike price of 251/8, which converts to 25.125, will continue to be expressed in fractions. This policy represents a compromise that will allow as many strike prices as possible in each class of options to be expressed in decimals while avoiding adjustments that would affect the substantive rights of holders and writers of options even by a small amount.

The proposed rule change is consistent with the requirements of Section 17A of the Act [3] and the rules and regulations thereunder applicable to OCC because it fosters cooperation and coordination with persons engaged in the clearance and settlement of securities transactions, removes impediments to and perfects the mechanism of a national system for the prompt and accurate clearance and settlement of securities transactions, and, in general, protects investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

OCC does not believe that the proposed rule change would have any material adverse impact on competition.

(C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

Written comments relating to the proposed rule change have not yet been solicited or received. OCC will notify the Commission of any written comments received by OCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions.[4] As discussed below, the Commission believes that the rule change is consistent with this obligation because it should facilitate the prompt and accurate clearance and settlement of options during and after the transition to decimal strike prices which has already begun.

The rule change should assure that OCC's existing policies regarding minimum adjustment increments and rounding in fractions will convert smoothly to options with decimal strike prices. The rule change should allow the process of decimalization of options to proceed concurrently with the move to the process of decimalization of the underlying securities.

The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after publication of the notice of filing because accelerated approval will permit OCC to immediately implement decimal strike pricing which will bring the pricing of such options in line with the pricing already in place for the underlying securities.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of OCC. All submissions should refer to File No. SR-OCC-00-7 and should be submitted by October 6, 2000.

Start Signature

For the Commission by the Division of Market Regulation, pursuant to delegated authority.5

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

2.  The Commission has modified the text of the summaries prepared by OCC.

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4.  15 U.S.C. 78q-1(b)(3)(F).

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[FR Doc. 00-23734 Filed 9-14-00; 8:45 am]

BILLING CODE 8010-01-M